Europe’s Economic Crisis, Euro Nations’ Political Backlash: The Fin(n)ish Line of the Euro Zone?

After great uncertainty and volatility, Finland has agreed to support participation in the Portugal rescue. How did Finland, the “EU model student”, turn into a euro-skeptic?

“The National Coalition party and the Social Democratic party have agreed to support participation in the Portugal rescue,” Jyrki Katainen, finance minister and leaders of the Conservatives (KOK), told reporters on Wednesday. With the agreement between Finland’s two biggest political parties to support the EU bailout for Portugal, the way is paved for EU finance ministers to authorize the €78bn ($110bn) bailout in Brussels next week – even if Finnish support is conditional.

The conditions include state asset sales by Portugal, which must also start talks with private investors to ensure their funds stay in the country before a bailout can be paid out. Moreover, Finland wants a guarantee that bailout donors will get their loans repaid before private investors.

The accord ends months of uncertainty over Finland’s willingness to participate in the rescue of Portugal. Katainen sought to secure Finnish support for Portugal’s rescue before the May 16 meeting of his European counterparts and ahead of next week’s coalition talks.

“The new government [of the Conservatives and the Social Democrats] is a government of the losers,” comments Timo Soini, the charismatic leader of the True Finns.

After all, the accord also means that the True Finns, the winner of the April election, will stay out of the coalition government. “Finland takes €9bn debt so that, with this debt, it can support these countries devoid of morality and save banks,” said Soini. “That just won’t do.”

Finnish Debate Over the Portugal Bailout

Until recently, watching Finnish politics used to be about “as interesting as watching paint dry,” as the New York Times has noted. That all changed on April 17. In this election, the Conservatives (20.4% of the vote) and Social Democrats (19.1%) retained their dominant positions, despite losses, but the True Finns (19.0%) won big, beating the Center Party (15.8%). With the eurozone crisis, the support of the euro-skeptics’ grew almost fivefold. To foreign media, it was a sensation. In Finland, the support of the Party had climbed steadily for months, hand in hand with the deterioration of the eurozone fiscal position.

Since the election, EU Economic and Monetary Affairs Commissioner Olli Rehn – a Finnish Centrist politician himself – had urged Finland’s political parties, time and time again, to back the EU-IMF bail-out package arranged for Portugal. Most recently, he compared the eurozone fragility with that of Lehman Brothers in the United States in 2008. “The decision on the EU-IMF program for Portugal requires unanimity amongst all member states,” he said. “Every member state counts.”

In the aftermath of the election, Jyrki Katainen, the chairman of the Conservatives, currently the biggest party, began the difficult negotiations to form a majority government.

Last Wednesday, the Finnish parliament was expected to decide on Finland’s stand on the proposed EU bailout package for Portugal. At the last moment, the SDP issued a list of conditions for approval of the package. Led by Chairman Jutta Urpilainen and Parliamentary leader Eero Heinäluoma, the Social Democrats have long wanted to place responsibility on investors. However, they would also like to assess the debt needs in a way that would allow restructuring, if necessary.

In turn, former Prime Minister Mari Kiviniemi said that her Center Party would support Finnish participation in the Portuguese bailout, arguing that participation in the effort makes sense from Finland’s standpoint, and from that of European financial stability. In fact, the Centrist standpoint was dictated not just by the EU crisis, but by Finnish presidential politics.

In early 2012, President Tarja Halonen, a left-wing Social Democrat, will leave the Presidential Palace overlooking the Market Square in Helsinki. As a result, the presidential game has been on for months already. In polls, the popular Sauli Niinistö, a veteran Conservative and former Speaker of the Parliament, has enjoyed a significant lead. However, the Center Party sees EU economy chief Olli Rehn as its prime candidate. Although the centrist veterans have been ambivalent about the bailouts, the party loyalists recognize that, if only for reasons of credibility, Rehn would fall out from the presidential game, if his own party would not support his pro-bailout position in the EU.

Of the large Parliamentary groups, only the True Finns came out against the Portuguese bailout. As Soini recently stated in the Wall Street Journal:

These bailouts are patently bad for Europe, bad for Finland and bad for the countries that have been forced to accept them. Europe is suffering from the economic gangrene of insolvency—both public and private. And unless we amputate that which cannot be saved, we risk poisoning the whole body.

From the Periphery to Euro Zone’s Top Class

In 1995 – after a half century long balancing act between the Soviet Union and the West – the majority of the Finns saw the European Union vital to Finnish prosperity and security. Since its membership, Finland has been a steadfast supporter of the EU and its model student. Today, only half a decade later, most Finns believe that the EU is detrimental to Finnish economy. What happened?

Finland joined the EU after a severe recession in the early 1990s, after the burst of the real estate bubble, the meltdown of the banking sector, the collapse of the Soviet Union, and the demise of the Finno-Soviet trade. The EU membership was supported by 57% of the Finns, after it had been promoted fervently by the dynamic Social Democratic duo, Prime Minister Paavo Lipponen and President Martti Ahtisaari, the 2008 Nobel Peace Prize laureate – as well as former PM Esko Aho who played a major role in persuading his Center Party behind the membership.

It was also in 1995 that Timo Soini founded the True Finns, the successor of the Finnish Rural Party (SMP); an old populist protest party that had thrived in the 1970s and 1980s, when tens of thousands of Finns had to move to Sweden for jobs. Like SMP’s Veikko Vennamo, Soini has shrewdly taken advantage of a very difficult economic environment, the consensus politics of the dominant parties, and the growing resentment among the electorate – which Vennamo used to call the “forgotten people.”

After World War II, no European ally paid all its war debt to the United States, except for Finland. “There is not much sympathy for countries that do not follow fiscal discipline – as it is so deeply rooted within us,” Erkki Liikanen, governor of the Bank of Finland, said recently.

Along with other Nordic countries, Finland has a long history of fiscal prudence and discipline. Unlike the debt-ridden “PIIGS” countries today (Portugal, Italy, Ireland, Greece and Spain), the Finns feel that they had to work their way through the severe recession, which sent unemployment from 2.1% in 1990 to 19.9% in May 1994.

However, 1995 came too early for Soini. True, there were still some 400,000 unemployed in the country of just 5.1 million. After half a century of Cold War and difficult geopolitics, the Finns wanted to catch up with the rest of the world. Soini had a party, but no wind beneath his wings.

After 15 years of relatively solid growth, the global financial crisis hit Finland hard, and the GDP contracted by over 8%; some 2% more than in the early 1990s, even more than during the Finnish Civil War in 1917-18.

Last year, the Finnish economy turned around demonstrating broad-based growth. Due to debt-financing, the worst impact of the crisis has not been felt. Moreover, no party wanted to take responsibility for the difficult decisions that were ahead – before the election, that is.

In 2010, the general government deficit was smaller than the 3%-of-GDP deficit limit set in the eurozone’s Stability and Growth Pact. However, the financial position, on the other hand, continued to weaken. The deficit deepened to 5.1% of GDP. Last year, Finnish GDP growth amounted to 3.1%. The increase in demand was mainly driven by rising exports, which were up by 5.1%. Investment in residential construction showed strong growth, and private consumption increased by 2.6%. During the ongoing year, the projected growth rate is 3.6%, a significant proportion of which comes from a carry-over effect.

Although the export industry is doing reasonably well, Finland has been losing competitiveness and market shares in recent years.

Competitive Erosion

Amid the severe recession of the early 1990s, Finland embraced a national export-led cluster strategy, which proved enormously successful, not least because of the dramatic expansion of Nokia. However, today many of the benefits of the national cluster strategy have been exhausted. The Finnish multinationals are dependent on the world market, no longer the national market. The highly-admired innovation system is national, but innovation takes place globally. After dominating the worldwide mobile markets from the late 1990s to 2007, Nokia has been under increasing fire from the high-end (Apple’s iPhone, Google’s Android, Korean Samsung and LG) and the low-end (agile and nimble Chinese and Indian low-cost rivals).

Through the Cold War, Finland was dominated by a few corporate giants. Even today, only 25 companies dominate half of Finnish foreign trade.

After expansion and concentration, forestry giants — Stora Enso, UPM Kymmene, and Metsäliitto — are coping with increasing global competition and strikes in the home base. Clerical staff for forest giant UPM in the Finnish cities of Tampere and Valkeakoski have gone on strike, while workers at Stora Enso and Efora in the northern city of Oulu have again started industrial action.

In the past two decades, the metal-engineering giants have established their footholds in global production networks. These flagship companies range from Metso, the global supplier of process industry machinery and systems, and the maritime and energy market giant Wärtsilä, to KONE, the fourth largest manufacturer of elevators and service provider, Outokumpu, a giant of stainless steel, and Ruukki, a major manufacturer and supplier of metal-based components and systems to construction and engineering industries.

In the 1990s, Nokia’s sub-contractors benefited greatly from the mobile giant’s globalization; but in the 2000s, many could not compete with offshoring and large rival suppliers, such as Foxconn, in Asia. Today, sub-contractors in the metal-engineering cluster fear that it is their turn to fall behind.

Like the forestry giants and metal-engineering flagships, even chemical concerns — Kemira, a chemical industry group, and Orion, a major pharmaceutical firm — have seized the opportunity to globalize.

The Finnish multinationals continue to grow and boost employment, but often more so outside Finland. The Finnish cluster leaders have given rise to new business, but their clusters have not given rise to new growth firms.

During the past decade, the Finnish national innovation system has engaged in increasing efforts to “stimulate” new business through a dozen national competence clusters, more than 20 centers of expertise, and half a dozen public-private strategic centers for science, technology and innovation. Led by the dynamic Mauri Pekkarinen, the Ministry of Employment and Economy, has persistently sought to nurture existing industries, cultivate new ones, and protect talented employees from excessive “creative destruction.”

Along with an impressive array of technology development and innovation institutions – including Tekes, the Finnish Funding Agency for Technology and Innovation; Finpro which seeks to support Finnish companies at different stages of internationalization; Sitra, the Finnish Innovation Fund; as well as the Science Academy of Finland – many national initiatives seek to facilitate international competence in business operations, job creation and regional development. Under Veli-Pekka Saarnivaara, Tekes, for instance, has become a benchmark model for many other nations.

Still, a critical mass of new growth businesses has not yet materialized, except for a few bright spots, such as Rovio Mobile, the maker of the blockbuster cell phone game called Angry Birds.

Since the late 1990s, the Finns have enjoyed a high level of prosperity, and solid growth in comparison to other EU nations. Today, this wealth and security works against risk-taking entrepreneurship that is vital for competitive resurgence. In the early 1990s, Finland was too dependent on Soviet trade. In order to overcome its vulnerability, the Finns embraced European integration. The key to success is not just how a nation competes, but where it competes. Now they may have become too reliant on Europe.

Euro-Centrism: Pros and Cons

Today, Finland’s trade is mainly with the other Baltic Sea Region economies (41%) and the advanced economies (30%), as measured by the G-7 nations. Together, these two sets of countries account for over 70% of Finnish trade. Most importantly, Finnish orientation is highly euro-centric. Europe dominates more than 80% of all Finnish direct investment abroad, and almost 60% of all Finnish exports. Only 16% of Finland’s trade is with the BRICs economies (China, India, Russia, Brazil) and just 5% with a set of other potential emerging economies.

Finnish trade is focused on proximate nations that have relatively prosperous economies, but diminishing growth prospects. Conversely, Finland’s trade is far less voluminous with more distant nations that have relatively poor economies, but great potential growth prospects. And that, in a nutshell, is the Finnish dilemma.

In the past few years, Finland’s competitiveness has been under erosion. In the future, Europe’s relative role in the world economy is likely to decline significantly. A year ago, the European Commission’s Europe 2020 strategy acknowledged that the global crisis had wiped out years of economic and social progress and exposed structural weaknesses in Europe’s economy. While coping with the immediate post-crisis pressures, Europeans have to prepare for the intensification of long-term challenges, including globalization, pressure on resources, and ageing. By May 2010, the eurozone crisis could no longer be contained.

Europe’s problems are not just cyclical and isolated, but structural and systemic. Today, they are taxing Europe’s competitiveness. As demonstrated by the Lisbon Review last year, the economic performance of the EU-27 average has fallen well behind the United States and East Asia, which is now the leading region. According to long-term projections, by 2050, the share of the four leading EU economies in the G-20 GDP will be more than halved to about 10%. In the absence of significant refocus, the Finnish export-led growth model will erode accordingly.

In order to optimize competitiveness, it is vital to protect fading sources of strength, while building emerging sources of strength. Currently, the focus is too little on the past – and not adequately on the future.

Socially, the rise of the True Finns reflects the underlying anxiety of many Finns that their way of life is changing, rapidly and irreversibly. Politically, it is just the latest indication that the reign of center-left parties in Scandinavia is approaching its end. While the right-wing populists in Sweden only managed 5.7 percent in 2010, the Danish People’s Party received 13.9 percent in 2007 parliamentary elections and their counterparts in Norway raked in 22.9 percent.

Like Germans, most Finns suspect that Europe’s problems are systemic. Muddling through the economic turmoil will not resolve them. Amidst the broadening political backlash, Europe has few alternatives left. It must move toward deepening integration, or cope with greater fragmentation.

With their bailout decision, the old Finnish parties opted for integrated Europe. According to polls, most Finns are more skeptical.